Retirement Income Planning: Mutual Funds

When willing to invest in mutual funds for Supplemental Retirement Income Planning, you have millions of alternatives. It is always important to analyze the plan, its limitations and the risks you will be running, and thus, it would be easier for you to narrow your alternatives. For this matter, it could be helpful to get in contact with a Retirement Income Planning financial professional.

Mutual funds are classified in three main categories that differ in regards to their risks, features and rewards. They are money market funds, bond funds, which also receive the name of “fixed income” and finally, stock funds, which are also called “equity funds”. Let’s take a deeper look at each one of them.

Money Market Funds can only invest in just some high-quality, short-term investment that be issued by the U.S. government, U.S. corporations and local governments. These funds attempt to keep the value of a share in a fund, called the net asset value (NAV) at a stable $1.00 a share. The returns for these funds have always been lower than the other two kinds of funds. Because of this, money market funds investors have to be aware about the “inflation risk”. Although Bond Funds are a bit risky than money market ones, most of the time, risks can be controlled with greater certainty than stocks. In addition, due to the fact that there are many types of Bund Funds, their risks and rewards vary greatly. These risks may encompass credit risk, which refers to the possibility that issuers whose bonds are owned by the fund do not pay their debts; interest rate risk and prepayment risk, which is associated to the chance that a bond be “retired” early. Finally, there are differences between one stock fund and another. For instance, Growth Funds are focused on stocks that provide large capital gains, Income Funds invest in stocks that pay regular dividends, and Sector Funds are specialized in particular industry segments. In general, they present a medium-to-high level of risk.

Thus, people who are planning to invest in a fund that combines growth and income, which are definitely key factors, may find mutual funds an interesting balanced alternative choice for Supplemental Retirement Income Planning.

SIMPLE Retirement Plan: 401(k) Version

SIMPLE 401(k) Retirement Plan defined

A new subset of the 401(k) plan is the SIMPLE 401(k) Retirement Plan. SIMPLE 401(k) Retirement Plan is a retirement plan sponsored by employers. Just like the SIMPLE IRA plan, this is a retirement plan that is very much attractive for small business owner with 100 or fewer employees because it avoids some of the administrative fees and paper work which are common on all retirement plans. Employers benefit from the tax-deductible contributions made to the plan, and employees may elect to have salary deferrals in order to contribute to the retirement plan. The employer has the option of matching a certain portion of the employee’s deferrals or making non-elective contributions to all eligible employees (an annual limit applies in both cases). A minimum compensation eligibility requirement exists for employees who want to join this retirement plan, and employees cannot establish any other qualified retirement plans at the same time.

Why would one choose a SIMPLE 401(k) retirement plan instead of a SIMPLE IRA or regular 401(k) retirement plan? The fact is the SIMPLE 401(k) retirement plan is a cross between a SIMPLE IRA and traditional 401(k) retirement plan and offers the best of both plans - for the most part. Following are some review of the features and benefits of the SIMPLE 401(k) plan and compare it to the traditional 401(k) plan.

Advantages

• There is no testing under this type of retirement plan. An employer that adopts a traditional 401(k) retirement plan may be required to perform certain non-discrimination and top-heavy testing to ensure that the plan operates in compliance with regulatory requirements. Generally, such testing must be done by professionals who specialize in that area and can be quite costly. SIMPLE 401(k) retirement plans, on the other hand, do not require these tests. That is why this is very attractive to small business owner with 100 or fewer employees and who likes the features of the 401(k) retirement plans, but can't afford the administration costs of testing.
• Also loans are allowed and this can be an attractive feature of a qualified plan because employees and business owners usually like the idea of being able to borrow their own funds and make loan and interest payments to their own accounts. The loan feature can be made available in both SIMPLE and traditional 401(k) retirement plans.

Disadvantages

• There is an immediate vesting of contributions. With a traditional 401(k), employer contributions can be subject to a vesting schedule, and this may help to reduce high employee turnover. But contributions to a SIMPLE 401(k) retirement plan are immediately 100% vested, which means that an employee who meets the requirements to receive distributions from the plan may withdraw his/her entire account balance at any time.
  
• Also, contribution limits for a SIMPLE 401(k) retirement plan are much lower than the limits for the traditional 401(k) retirement plan. For instance, the salary deferral limits of both plans are as follows:

Year	SIMPLE Deferral Limit	Traditional 401(k) Deferral Limit
2002	$7,000	$11,000
2003	$8,000	$12,000
2004	$9,000	$13,000
2005	$10,000	$14,000
2006	$10,000	$15,000
2007	$10,500	$15,500

Furthermore, employer contributions to an employee's SIMPLE 401(k) retirement plan account are limited to 3% of the employee's compensation, while for the traditional 401(k) retirement plan; the employer may contribute up to 25% of the employee's compensation. Also, the compensation limit applies to both plans, which means the employer cannot consider compensation in excess of $220,000 for 2006 ($225,000 for 2007) (indexed) for plan purposes. Therefore, an employee's total contribution to a SIMPLE 401(k) retirement plan for 2007 can be as much as $17,250 (salary deferral of $10,500 + 3% contribution of maximum salary of $225,000) + catch-up contributions, while contributions to a traditional 401(k) retirement plan can be as much as $45,000 + catch-up contributions.

• An employer who establishes a SIMPLE 401(k) retirement plan cannot maintain any other plan for employees who are eligible to participate in the SIMPLE 401(k) retirement plan. By contrast, provided certain requirements are met, an employer who establishes a traditional 401(k) retirement plan may choose to establish a SEP, profit-sharing or other defined-contribution plan, maintain both plans concurrently and allow eligible employees to participate in both plans.

SIMPLE 401(k) Retirement Plan Eligibility Requirements for Employer and Employee

• The SIMPLE 401(k) retirement plan is available to those same employers who are eligible to adopt a traditional 401(k) retirement plan: this includes sole proprietors, partnerships and corporations. However, while there is no restriction on the number of employees for the traditional 401(k) retirement plan, only employers who adhere to the 100-employee limit can adopt a SIMPLE 401(k) retirement plan. Under the 100-employee limitation rule, a SIMPLE may be established by an employer that had no more than 100 employees who received at least $5,000 in compensation for the preceding year.
  
• Employees who are at least 21 years old and have completed at least one year of service must be allowed to participate in the SIMPLE 401(k) retirement plan.

Annual Notice Requirements
Employer must provide a deferral notice to each eligible employee for the year the plan is established and for each year the employer continues to maintain the plan. Generally, the notification must be provided at least 60 days before the employee would be eligible to participate in the plan. This notification must include a statement of the employee's right to make salary-deferral contributions to the plan and to terminate his or her participation in the plan.

Also, an employer is required to provide employees with an explanation of the plan’s features and benefits prior to the effective date of the plan.

Deadline to Establish SIMPLE 401(k) Retirement Plan
A SIMPLE 401(k) retirement plan must be established between Jan. 1 and Oct. 1. An exception applies to businesses that come into existence after Oct. 1. For these businesses, the plan can be established as soon as administratively feasible.

Conclusion
We have reviewed some of the highlights of the SIMPLE 401(k) retirement plan. As you can see, the SIMPLE 401(k) retirement plan boasts some attractive features, but it also has some disadvantages when compared with other retirement plans. If you think SIMPLE 401(k) retirement plan might be suitable for your business, be sure to consider the pros and cons.

Thank you for visiting.

Sources:

http://www.investopedia.com

http://www.investorwords.com

SIMPLE Retirement Plan: IRA Version

The SIMPLE Individual Retirement Account plan is an IRA-based plan that gives small employers a simplified method to make contributions toward their employees' retirement and their own retirement. Under this retirement plan, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. All contributions are made directly to an Individual Retirement Account or Individual Retirement Annuity set up for each employee. This type of retirement plans (SIMPLE IRA) is maintained on a calendar-year basis. See IRS Publication 560, IRS Publication 590 and IRS Notice 98-4 for detailed information on this type of retirement plans.

The IRA-type SIMPLE retirement plan provides you and your employees with a simplified way to contribute toward retirement. It reduces taxes and, at the same time, attracts and retains quality employees. And compared to other types of retirement plans, SIMPLE IRA plans offer lower start-up and annual costs … they are just simpler to operate.

Other Advantages of a SIMPLE Retirement Plan IRA version:

· SIMPLE IRA plans are easy to set up and run – your financial institution handles most of the details.

· Employees can contribute, on a tax-deferred basis, through convenient payroll deductions.

· You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay.

· You may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting a SIMPLE IRA plan. (IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs).

· Administrative costs are low.

· You are not required to file annual financial reports.

Actually, this retirement plan is much less burdensome for an employer than other types of retirement plans. For example, the employer has no requirement to make annual filings to the IRS. Employers with other types of retirement plans must file Form 5500 each year.

The employer must provide a description of the retirement plan to employees but it is a much simpler format than the Summary Plan Description required of other types of qualified retirement plans. The SIMPLE summary description includes the name and address of the employer, eligibility requirements for employees, a description of the benefits provided, the time and method of collecting contributions, and the procedures and effects of withdrawals from the plan including rollovers. A one or two-page summary should be sufficient to meet this requirement as compared to the detailed summary plan descriptions that are often needed for other qualified retirement plans.

The other information that must be provided to an employee is the election form at least 60 days in advance of the year and an annual statement of accounts within 30 days after the end of the year.

The employer is also responsible for applying the proper tax treatment on employee and employer contributions. Employee contributions are not subject to income tax withholding but are subject to social security (FICA) taxes.

The employer must observe the $150,000 (indexed) limit on the compensation that can be considered in the plan as required for other qualified retirement plans.

The IRA-time SIMPLE retirement plans also give the employer some flexibility in making the contribution. For example, the 100% match on the first 3% of employee contributions can be reduced to a 100% match on the first 2% or 1% of pay the employee contributes. This limit, however, cannot be used any more frequently than two years out of five. For example, an employer might match employee contributions of up to 3% for the first year, reduce the match to only 1% for the next two years, and revert to matching up to 3% for the following two years.

The employer also has the option of making a uniform 2% of pay contribution for all employees eligible for the retirement plan whether or not they contribute, in lieu of the matching contribution. Depending on how many employees elect to participate and the percentage of pay they choose to contribute, the 2% uniform contribution may be more or less expensive than the matching contribution. The matching contribution, however, provides more incentive for employees to save their own money towards retirement on a tax-efficient basis.

SIMPLE Retirement Plan: An Easier Way for Employers to Provide Retirement Benefits

The Small Business Job Protection Act of 1996 makes available a new type of retirement plan for employers with no more than 100 employees. This type of plan is referred to as the SIMPLE plan (for Savings Incentive Match Plans for Employees of Small Employers). The purpose of the SIMPLE plan is to allow employers an easier way to establish and maintain a retirement plan for their employees.

To implement this, an employer must meet two basic requirements to have a SIMPLE plan. First, the employer must have no more than 100 employees (counting only employees with at least $5,000 of annual compensation). If an employer has adopted a SIMPLE plan and then grows to more than 100 employees, it's given a 2-year grace period to operate the SIMPLE plan and then must convert to another type of qualified retirement plan. The second is that the employer should have no other qualified retirement plan. For example, an employer with a defined benefit pension plan cannot establish a SIMPLE plan. However, as we shall see an employer that currently sponsors a 401(k) plan and has no other plan can easily modify their 401(k) plan to meet the rules for SIMPLE plans.

There are two routes for setting up a SIMPLE plan:

1. An employer can either use IRA's for holding the retirement accounts of each participant or

2. can set up a trust or insurance contract and operate the plan as a kind of 401(k) plan.

Some of the rules for SIMPLE plans are the same for the IRA and 401(k) variations but other rules are significantly different. Understanding these differences is a key to deciding which arrangement will work better for a specific employer.

Basic Features

SIMPLE plans have a specified employer contribution and immediate vesting. The employer contribution required to a SIMPLE plan is a 100% match of the first 3% of pay an eligible employee elects to contribute to their retirement account.

Employees are allowed to contribute to the plan on a pretax basis as much as $6,000 per year.

Small Businesses Offering Retirement Plans

Only 34.4% of firms with fewer than 25 employees offered retirement plans to their employees. Source: Congressional Research Service, 2004

Retirement plans that can be implemented by small businesses includes, the simplified employee pension-IRA (SEP-IRA), the traditional 401(K), the safe harbor 401 (K), and the savings incentive match plan for employees (SIMPLE)…SIMPLE IRA and SIMPLE 401(K).

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 offers tax credits to any business with 100 or fewer employees that establishes a pension plan. Such businesses are eligible for credit up to 50% of the first $1,000 spent on retirement education and administration, to a maximum of $500 per year for the first three years. Eligible employees must have received $5,000 in compensation, and there must be at least one “highly compensated” employee who owned more than a 5% interest in the business at any time during the previous year or who receives compensation of more than $95,000 in 2005 (increased from $90,000 for 2004).

The law also includes a provision enabling employees age 50 or older to “catch up” by making incremental contributions to compensate for any years in which they did not participate in a pension plan. Another provision offers a tax credit to low-income participants; they can receive a nonrefundable tax credit of up to 50% on up to $2000 in contributions to specified plans, for a maximum credit of $1,000. This credit is in addition to the tax deduction already associated with contributions to such plans.

In order to ensure that all retirement plans have a representative balance of participants and are not dominated by higher-paid employees, they are subject to annual top-heavy testing (IRC section 416(g)). If a plan becomes top-heavy, the employer must provide a minimum contribution to all non-key employees, based on how much they have contributed to the plan—out of their own salaries or in the form of employer contributions—during the year.

What is Top-Heavy Testing and Key Employees?

A “key employee” is one who at any time during the preceding plan year was:

* A 5% owner
* A 1% owner whose annual compensation exceeded $150,000
* An officer receiving more than $130,000 in compensation.

The IRS considers a plan “top-heavy” if the account values for key employees exceed 60% of the account values for all employees. For example: A small business employs a total of 11 people, three of whom meet the criteria for “key employees.” If the account values for the three key employees total $15,000, while the account values for all 11 employees total $24,000, the plan would be considered top-heavy because the account values for the key employees equals 63% of the account values for all employees.

To make it less likely that a plan would be deemed top-heavy, the EGTRRA narrowed the definition of key employees by nearly doubling the compensation limit from $67,500 in 2000 to $130,000 in 2001. It also allowed companies to count matching contributions toward satisfying the minimum contribution requirements.

The top-heavy rules are particularly harsh on small businesses that employ family members; they discriminate by treating all family members as key employees, regardless of salary level and percentage of ownership (IRC section 318). This makes it difficult for family-based small businesses to pass top-heavy testing and continues to be a major deterrent to their implementing pension plans.

Source: aicpa.org

401(K) and IRA: How to Pick the Best Retirement Plan?

Living in retirement successfully will depend upon making the right financial choices. Many people want to know if they should invest in a 401k plan or an IRA. Both the 401(K) and the IRA (Individual Retirement Account) are ways to save money for purposes of retirement. But occasionally, it is sometimes used for major purchases such as the college education of a child or a down payment on a house. The principal difference between the two is quite simple. A 401(K)s are retirement saving plans offered through your employer, and an IRA is self-directed or a plan you set up on your own, with the help of a bank, mutual funds or other financial agency. There are people that have no option for savings but to open an IRA. If an individual is self-employed, owns a business or freelances, he or she may not have access to opening a 401(K). You generally need to be employed by a company that offers a 401(K) savings plan to have one.

There are some differences between the 401(K) and the IRA. Some people have both because of one of the major differences between the plans. A 401(K) may have a maximum savings amount or a maximum percentage of your salary that you can place in an account. You might be limited to a 10% contribution of your salary, and as of this year, the maximum tax-free amount you can place in a 401(K) is $16,000 USD. This will adjust each year if inflation occurs. Benefits to the 401(K) that the IRA doesn’t have are employer-matching programs.

Most often employers offer to match some or all of what you invest in your 401(K). This may be either half of you invest or six percent of your salary. If you invest 6% of your $100,000 USD salary per year, that’s $6000 USD, a company might completely match that $6000 USD investment, giving you $12,000 USD total in investments. This money is not taxable unless you withdraw it, and you may be able to avoid taxes on it entirely if you spend it on certain allowable expenses.

Non-taxable IRA contributions are lower than those for people who invest in their 401(K). Within this year, for instance, you could claim up to $5000 USD of your income as nontaxable if invested in an individual retirement account. Sometimes people invest their taxed income in a Roth IRA. Since it has already been subject to tax, it isn’t taxed when it is removed. It can be slightly more challenging to remove money from your independent retirement account without paying heavy fines, but it may be slightly easier to change the way your invested money is distributed.

Money in 401(K)s and IRAs may be diversified into stocks, bonds, and mutual funds. If you don’t like how something is performing, usually you can change the way your money is distributed more easily in an IRA. Some 401(K)s limit the number of times per year you can make changes. On the other hand, some 401(K)s have caught on and now allow employees to actively manage their investments on a regular basis.

You can generally funnel more money into IRAs than a 401(K), though you get less tax benefit from it. Yet the advantages of the 401(K) are many: chief among them is the employee-matching program, which might double the money you invest. However, if you plan on retiring early, you may need to use both types of savings accounts to boost the amount of money available to you when you retire. Many people who have larger incomes and larger amounts of money to invest use a combination of 401(K) investments and Roth IRAs.

Retirement Plan under Traditional IRA

We know that an IRA or an Individual Retirement account is a personal savings plan that provides income tax advantages to individuals saving money for purposes of retirement. We know also that IRAs comprise a special class of retirement accounts in the United States which give varying tax benefits depending on the type of IRA chosen. Common choices are the Roth IRA and the Traditional IRA. Since we are through with Roth IRA, now let’s talk about the Traditional IRA or TIRA and its features.

A traditional IRA is any IRA that is not a Roth IRA, a SIMPLE IRA, or an education IRA. The IRA or Individual Retirement Account is held at a custodian institution such as a bank or brokerage, and may be invested in anything that the custodian allows. Unlike the Roth IRA, the only criterion for being eligible to contribute to a Traditional IRA is sufficient income to make the contribution. However, the best provision of a Traditional IRA — the tax-deductibility of contributions — has strict eligibility requirements based on income, filing status, and availability of other retirement plans. Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while still in the account, but upon withdrawal from the account, withdrawals are subject to federal income tax. This is in contrast to a Roth IRA, in which contributions are never tax-deductible, but qualified withdrawals are tax free. The traditional IRA also has more restrictions on withdrawals than a Roth IRA. With both types of IRA, transactions inside the account (including capital gains, dividends, and interest) incur no tax liability. The following are advantages and disadvantages of a traditional IRA:

Advantages

• The main advantage of a Traditional IRA, compared to a Roth IRA, is that contributions are often tax-deductible. If a taxpayer contributes $4,000 to a traditional IRA and is in the twenty-five percent marginal tax bracket, then a $1,000 benefit ($1,000 reduced tax liability) will be realized for the year. Because qualified distributions are taxed as ordinary income (the taxpayer's highest rate), the long-term benefits of the traditional IRA are only comparable to those of a Roth IRA (whose qualified distributions are tax free) if the current year tax benefit ($1,000 above) is reinvested.

• Also, if a taxpayer expects to be in a lower tax bracket in retirement than during the working years, then a traditional IRA offers an increased incentive over the Roth IRA.

• Another advantage of a Traditional IRA is that the taxpayer gets the tax benefit immediately.

• With the Roth IRA, there may be a risk that over the next several decades Congress will decide to tax Roth IRA distributions.

Disadvantges

• There are the eligibility requirements for the tax-deductibility. If one is eligible for a retirement plan at work, one's income must be below a specific threshold for your filing status.

• All withdrawals from a Traditional IRA are included in gross income and subject to federal income tax (with the exception of any nondeductible contributions; there is a formula for determining how much of a withdrawal is not subject to tax). If one's investment style is buy-and hold or dividend-seeking, then a Traditional IRA is at a disadvantage since holding stocks in an IRA means they lose their favorable tax treatment given to dividends and capital gains.

• If one has a lot of disposable income, a Roth IRA in effect shelters more assets from taxes on gains than a Traditional IRA does. Suppose someone with $4000 to invest is eligible to either contribute $4000 to a Roth IRA, or to contribute $4000 to a Traditional IRA and deduct it. If one chooses the Traditional IRA, then one receives an upfront tax deduction (worth, say, $1000 to someone in the 25% tax bracket). When the money is withdrawn from the Traditional IRA it will be taxed at marginal rates. On the other hand, if one chooses the Roth IRA, then there is no upfront tax deduction, but the money and the gains are all exempt from taxes upon retirement. So, someone must be in a lower tax bracket upon retirement than in their contribution year for a Traditional IRA to be tax preferential to a Roth IRA.

• Perhaps the greatest disadvantage of the Traditional IRA is its forced distributions based on age. Withdrawals must begin at age 70½ (more precisely, April 1 of the calendar year after age 70½ is reached) according to a complicated formula. If an investor fails to make the required withdrawal, half of the mandatory amount will be confiscated automatically by the IRS. The Roth is completely free of these mandates.

• In addition to the distribution being included as taxable income, the IRS will also assess a 10% early distribution penalty if the participant is under age 59½. The IRS will waive this penalty with some exceptions, including first time home purchase (up to $10,000), higher education expenses, death, disability, un-reimbursed medical expenses, health insurance, annuity payments and payments of IRS levies, all of which must meet certain stipulations.

What is Roth Individual Retirement Account or simply Roth IRA?

As discussed earlier, an IRA or an Individual Retirement account is a personal savings plan that provides income tax advantages to individuals saving money for purposes of retirement. However, IRAs comprise a special class of retirement accounts in the United States which give varying tax benefits depending on the type of IRA chosen. And one of the common choices is the Roth IRA.

Roth IRA is the brainchild of Senator William Roth (R-DE), a fiscal conservative involved in a number of tax-related bills. Since its creation in 1977, Roth IRA has become very popular amongst diverse groups of people, and it is one of the most commonly recommended investment strategies for middle-class Americans.

This type of IRA can be invested in a range of gaining strategies, including mutual funds and traditional stocks. When money is first invested in a Roth IRA, it is federally taxed based on the tax bracket one currently inhabits, something that may be a downside for some when compared to a traditional IRA. When money is taken out of the Roth IRA, however, funds up to the amount put into it are always federal-tax free, and often the entirety of the funds are free from federal taxes.

There are also penalties associated with Roth IRA and withdrawing money early. By withdrawing before retirement, one may incur both federal taxation and a 10% direct penalty. Luckily, these penalties are not always triggered, as there are exemptions for cases such as purchasing a house or paying for college. There is never a penalty for withdrawing money up to the amount one has put into the account, penalties are only ever incurred when drawing on earnings.

The Roth IRA is particularly recommended for people who are currently in a relatively low tax bracket and anticipate retiring in a higher bracket. By paying taxes while in a low bracket, say 15%, such people can avoid potentially much higher taxes at their age of retirement if their income level increases sufficiently to knock them up into a higher bracket, say 40%. With a traditional IRA, the entirety of their earnings -- even those they put away while in a 15% bracket -- will be taxed at 40% if that is the bracket they are in when they cash out their IRA. With a Roth IRA, however, they pay taxes based on their current bracket at each investment interval, potentially saving enormous amounts of money by the time they retire. High-level corporate execs need not apply for this type of IRA.

In order to take full advantage of a Roth IRA, one's income must be within a specific range, based on marital status. Once income drops below that level, the amount a person may contribute to their Roth IRA drops, and once income rises above an upper cap, they are no longer allowed to put money into a Roth IRA at all.

So, if you are planning to retire think of this retirement account and also read my posts on Ten Steps for Retirement Preparedness and Tips on Retirement.

Good luck!

Different Types of Retirement Plan under IRA

As we have known earlier, IRA is an Individual Retirement Account (also known legally as Individual Retirement Arrangement). It is a personal savings plan that provides either a tax-deferred or tax-free way of saving money for retirement purposes. However, there are many different types of accounts within the world of this retirement plan, depending on the financial goals and situations of each individual. These are Traditional IRA, Education IRA, SEP IRA, Simple IRA and the Roth IRA. Though the common choices are the traditional and Roth IRAs others have good features as I’ve stated depending on one’s situation and financial goal.

TRADITIONAL IRA

You can contribute up to $2,000 per year into an IRA. The amount of this contribution that is deductible on your income tax return depends on your Adjusted Gross Income (AGI) and whether you are covered under an employer sponsored qualified retirement plan. Thus, depending on your filing status (Single, Joint, etc), and your AGI, your contributions may range from fully deductible to totally non-deductible. So even though you are eligible to contribute to your IRA, you may be in a position where none of these contributions are in fact deductible.

EDUCATION IRA

You can put away up to $500 per year into an education IRA, the money grows tax-free and has preferential tax treatment upon distribution to the beneficiary who uses it for authorized education expenses. These plans are not very common in that they are very restrictive on who can make contributions to them, the amount of total contributions allowable each year, and the limitations on what exact education expenses qualify. Your financial planner should be able to assist you in evaluating what savings plan you should undertake to prepare for higher education costs, as well as in reviewing many of the tax-sheltered savings plans now sponsored by the various states, even for benefits of non-state residents.

SEP IRA - Simplified Employee Pension

This is an employer established and funded Simplified IRA, where the employer can put up to 15% of your compensation into a special IRA account. Sole proprietors may establish these plans for their own benefit. They are sometimes used instead of Keogh retirement plans because they have fewer administrative and tax filing requirements.

SIMPLE IRA - Savings Incentive Match Plan for Employees

This is a rather new creation, but rapidly becoming more popular. It is another employer sponsored and administered retirement plan. The attractive features of this plan includes not only the ability for the employer to establish and fund a retirement plan for the benefit of him/herself and his/her employees, but it also permits employees to contribute up to 100 %, but no more than $6,500 per year, into an IRA. Separate rules relative to required employer contributions and premature distributions apply.

ROTH IRA

Contributions are NOT deductible when the funds are contributed, but the Roth IRA earnings accumulate tax-free and remain tax-free upon distribution. To be eligible to contribute, your Adjusted Gross Income must be under $95,000 for singles and $150,000 for married couples, as of December 2000. You cannot withdraw your funds within the first 5 years after the establishment of the Roth without a penalty. Given that this 5-year testing period can successfully be addressed by proper tax planning, the establishment and at least partial funding of a Roth IRA account should be on the discussion list of the financial advisor of every taxpayer who qualifies to open such a plan.

What is an IRA or an Individual Retirement Account

An IRA or an INDIVIDUAL RETIREMENT ACCOUNT is a personal savings plan that provides income tax advantages to individuals saving money for retirement purposes.

IRA works like this. You invest money in an IRA, up to the amounts allowable under the tax law. These investments are termed "contributions." In many instances an income tax deduction is available for the tax year for which the funds are contributed. The contributions, as well as the earnings and gains from these contributions, accumulate tax-free until you withdraw the money from the account. You therefore enjoy the ability to generate additional earnings, unreduced by taxes on these earnings, each year the funds remain within the IRA.

The withdrawals of the funds from the IRA are termed "distributions." Distributions are subject to income taxation, generally in the year in which you receive them. (Remember that in most cases you received an income tax deduction when you contributed the money to the IRA.) As with most things involving the government, the rules for distributions are more complicated than they need to be.

Since the original purpose of the IRA is to assist you in providing for your own retirement, there is a disincentive for withdrawing your IRA funds prior to an assumed retirement age of 59 1/2. This disincentive takes the form of a tax "penalty" in the amount of 10 % of the distributions received by you prior to age 59 1/2, unless certain exceptions apply. Given the complexity of this issue alone, professional advice should be obtained whenever significant amounts of distributions are needed prior to age 59 1/2. The fact is that many times the penalty can be avoided with proper planning. Obviously these distributions are subject to income taxation upon receipt whether before age 59 1/2 or later. Once you are age 59 1/2 this penalty termed, "Premature Distribution" penalty are no longer applicable.

On the flip side of the government not wanting you to withdraw your money at too young an age, it also has rules to prevent you from not withdrawing the money soon enough. (This is done in order that the government can tax it.) You usually need to begin taking money from your IRA no later than April 1 of the calendar year following the date you attained age 70 1/2. The rules established by the government regarding these Required Minimum Distributions, their timing, the amounts, the recalculations, and the effect various beneficiary designations have on them, are among the most complex of the Internal Revenue Code. The penalty is 50 % of the shortfall between what you should have withdrawn and the amounts you actually withdrew by the proper date. This punitive penalty is matched only by the civil fraud penalty in severity. The necessary calculations are therefore not something that most individuals should attempt on their own.